Governor Schwarzenegger Signs Design-Build Measure to
Expand the Design-Build Method to Cities, Counties, and Special Districts

On September 26, 2008, Governor Schwarzenegger signed Assembly Bill 642. AB 642 expands existing design-build authority of public agencies by adding Public Contract Code Section 20175.2, authorizing all cities to use the design-build method for the construction of buildings for projects exceeding $1 million, and Public Contract Code Sections 20193-20195, authorizing all cities, counties, cities and counties, and special districts to use design-build contracting to construct local wastewater treatment, solid waste, or water recycling facilities exceeding $2.5 million.

Under existing law, only certain cities can generally enter into design-build contracts in accordance with specified provisions with the approval of its city council. There are specified procedures in soliciting and evaluating bids and awarding contracts for the construction, repair, or improvement of any public structure, road or other improvement.

Cities Authorized to Use "Design-Build" Method for Building Construction Greater than $1 Million

The Local Agency Public Construction Act (Public Contract Code Section 20100 et seq.) requires local officials to invite bids for construction projects and then award contracts to the lowest responsible bidder. This "design-bid-build" method is the traditional approach to public works construction. The "design-build " method allows cities to procure both design and construction services from a single company before the development of complete plans and specifications. With the addition of Public Contract Code Section 20175.2, any city, with the approval of the city council, may now use design-build contracts for the construction of buildings or improvements directly related to the construction of a building greater than $1 million. The authority does not extend to construction of streets and highways, public rail transit, or water resource facilities and infrastructure. Section 20175.2 will remain in effect until January 1, 2016.

Cities that utilize the design-build process must follow a four-step process which requires (i) the preparation of documents describing the project and its specifications, (ii) the preparation of a detailed request for proposals that invites interested parties to submit competitive sealed proposals, in a manner described by the city, (iii) the establishment of a detailed procedure to pre-qualify design-build entities, and (iv) the establishment of procedures to select design-build entities. (Public Contract Code Section 20175.2(d).) Cities using the design-build method must select the design-build contractor by using either a competitive bidding process in which the award goes to the lowest responsible bidder, or a "best value competition" in which the city officials set the criteria. At least 50% of the weight of these best value factors must include price, technical design and construction expertise, life-cycle costs over 15 years or more, skilled labor force availability, and acceptable safety record. (Public Contract Code Section 20175.2(d)(4).) Once the evaluation is complete, the top three responsive bidders are ranked sequentially from the most advantageous to the least and the award goes to the proposal ranked as the most advantageous. After publicly announcing the award, the city must also identify the second and third ranked bidders.

A city council wishing to proceed under the "design-build" method must establish and enforce a labor compliance program or must contract with a third party to operate a labor compliance program. The requirement for a labor compliance program does not apply if the city or the design-build entity has a collective bargaining agreement. (Public Contract Code Section 20175.2(b)(5).) The successful design-build contractor must be bonded and carry sufficient errors-and omissions insurance that covers all design and architectural services for the project. (Public Contract Code Section 20175.2(e).) The successful design-build contractor must adhere to minimum performance criteria and design standards and any deviation from these requires the city's written consent. (Public Contract Code Section 20175.2(g).) The successful design-build contractor may use subcontractors who were not listed in its original bid. The contractor must subcontract by following the procedures established by the city, including publishing notices and setting deadlines. (Public Contract Code Section 20175.2(f).) If the city requires a performance and payment bond in the solicitation of bids, then the retention proceeds withheld by the city from the design-build contractor must not exceed 5% of the project costs. (Public Contract Code Section 20175.2(k).)

Cities, Counties, and Special Districts May Now Use "Design-Build" Method for the Construction of Wastewater, Solid Waste Management, and Water Recycling Facilities In Excess of $2.5 Million

Under Public Contract Code Section 20193(a), a City, County, City and County, or special district, that operates a wastewater facilities, solid waste management facilities, or water recycling facilities, with approval of its governing body, may utilize an alternative procedure regarding the bidding on projects in excess of $2,500,000.00. A maximum of 20 design-build projects are permitted using the alternative procedure, and the public entity may use either lowest responsible bidder or by best value. Under Public Contract Code Section 20195, this law shall remain in effect until January 1, 2020 and is repealed as of that date unless extended by the Legislature.

According to Subsection (b), if the public entity proceeds under Section 20193, it must either establish and enforce a program to comply with Labor Code Section 1771.5, or contract with a third party to do so, unless it has entered into a collective bargaining agreement that binds all of the contractors performing work on the projects.

Under Subsection (c), "design-build" means a procurement process in which both the design and construction of a project are procured from a single entity, which is known as a "design-build entity." Under this section, a "project" must be for the construction of regional and local wastewater treatment facilities, regional and local solid waste facilities, or regional and local water recycling facilities.

According to Subsection (d), design-build projects must progress in a four-step process. The first step is that the public entity must prepare a set of documents that set forth the scope of the project. This subsection sets forth required details regarding the project scope, and provides that the architect or engineer retained to develop the project may not participate in the preparation of the bid. The second step requires the public entity to prepare a request for proposals that invites competitive sealed proposals, which must include the scope and needs of the project, expected cost range, and methodology used to evaluate proposals. If the public entity reserves the right to negotiate with bidders, the RFP must specify applicable rules for the negotiation process to ensure that discussions are held in good faith. The third step requires the public entity to establish a procedure to prequalify design-build entities using a standard questionnaire. The public entity must consult with the construction and surety industry in developing the questionnaire, which must inquire, under oath, as to type of business organization, experience and competence, licenses and other credentials, adequate insurance and bonding, previous violations of occupational safety and labor laws, defaults, previous violations of prevailing wage laws, bankruptcies, and legal disputes. The fourth and final step requires the public entity to establish a procedure for final selection of a design-build entity. The selection must be based on either a competitive bidding process resulting in lump-sum bids by the lowest responsible bidder utilizing the prequalification process, or best value and other criteria using a specified system that ranks bidders based on various criteria, including skilled labor force availability and safety record.

Under Subsection (e), a selected design-build entity must possess sufficient bonding and errors and omissions insurance to cover all design and architectural services provided in the contract. Subsection (f) dictates the requirements for the use of subcontractors in design-build projects, including qualification of subcontractors, and the subcontractor bidding process to be used by design-build entities. Subsections (g) through (j) provide various other requirements, including that minimum performance criteria and design standards set forth in the scope of the project must be adhered to and any deviations must be consented to in writing by the public entity. Also, the public entity may retain the services of design professionals or project managers to ensure compliance with project requirements. Finally, Section 20193 does not alter any remedies or rights available to the public entity. Subsection (k) provides limitations and requirements with respect to retention proceeds.

Subsection (l) requires the public entity to notify the Legislative Analyst's Office (LAO) upon initiation and completion of the project, and submit a report to the LAO upon completion of the project that includes information as to the type of project, square footage, identification of design-build entity, estimated and actual costs, description of written protests and their resolution, and assessments of prequalification procedures. Under Subsection (m) the public entity may also report to the LAO if it elects not to use the authority under section 20193 and explain the reasons therefor. Under Subsection (n), the State Office of Planning and Research (OPR) is required to maintain a list of public entities that are qualified and eligible to utilize Section 20193. In order to be on the list, a public entity must apply in writing. It must have complied with the California Environmental Quality Act with respect to the project before it applies. The OPR must approve or deny the application in writing within 30 days. Finally, if the public entity no longer wishes to utilize section 20193, it must notify the OPR in writing within 30 days of its determination. Finally, under subsection (o), the OPR must report to the legislature based upon information it receives pursuant to subsection (l) for the purpose of modifying or extending section 20193.

Additionally, Public Contract Code Section 20194 specifies that the authority for design-build of wastewater treatment facilities, solid waste facilities, and water recycling facilities is new and independent, and does not supersede or alter any other statutory design-build authorization. It also specifies the legislative intent to create a design-build pilot project for local and regional water and wastewater treatment facilities, solid waste facilities, and water recycling facilities, and not for other types of public projects.

For more information, contact the authors of this article:
Email Matthew Lavrinets , mlavrinets@meyersnave.com
Email Elizabeth Pianca , epianca@meyersnave.com

Additional contact: Ben Reyes, Chair of the Public Contracts and Construction Practice Group, breyes@meyersnave.com
Email Ben Reyes